Steering Clear of Risk in the 'New Normal' Economy

PIMCO’s Bill Gross advises investors to stick to low-risk bonds and stable dividend-paying equities in his latest Investment Outlook:

” If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? ”

The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.

“Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets – stocks, high yield bonds, and commercial and residential real estate will involve just that – risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.”

Comments

[David Van K...:]

Gross is a smart guy, but he's really biased. As to consumers and investors (and banks?) being changed for a generation, I'm not so sure. The tech/telecom bubble was supposed to have sobered everybody up, but even as it was deflating, the housing/mortgage/leverage bubble was inflating. The same behavior just moved to another realm. Greed is a basic human trait, and American culture reinforces it. It's probably popping up somewhere right now even as the "generational deleveraging" is declared. Let's see how long the savings rate stays at 8%.

Jul 02 09:49 AM